How Fintech startups become messiah of the MSME sector?

For several decades MSME (Micro, Small and Medium Enterprises) cut out a very sorry picture. While banking sector’s unapologetic apathy towards MSME’s credit needs was partly unjustifiable, what was really worse was financial community turning a complete blind eye to MSME’s magnanimous contribution to the Indian economy.

To decode MSME’s critical contribution to Indian economy, here are some of the important facts:

MSME provides employment to nearly 80 million people across the country

45% of India’s total manufacturing output and 40% of export comes come from MSME

MSME has always been on the forefront of rural industrialization

MSME’s role in keeping urban migration under control cannot be understated

Unfortunately, these impressive facts made little difference to India’s banking community. They chose to fall victim to excuses that invariably perceived the reality with a skewed eye. Hence most of the credit hungry micro, small and medium size companies were left frustrated. Even ministry of MSME, which was created by the Govt of India in 1999 to stimulate the sector, could not solve the credit conundrum. Most of the MSME’s credit schemes got lost into the infamous red tape and paperwork that marks the failure most of the government schemes.

Enter Fintech startups: the new champion of MSME industry

After enduring callous attitude of the banking sector for several decades, MSME’s galloping cry for credit could have been only heard and appreciated by something very unexpected. Fortunately, by turn of the last century the geniuses of this unexpected phenomenon had started germinating in the small lanes of India’s cosmopolitan cities; miles away from where most of small and medium companies operated their factories. This phenomenon was tagged as ‘Fintech startups,’ which today is a critical part of larger phenomenon of Indian startups.

These Fintech startups saw the huge credit gap in MSME’s space as a big market opportunity for them. The growth of several cutting edge technologies became the much needed arsenal in their hand. A sophisticated & robust algorithm and others tools sharpened by technologies like AI & machine learning is all it took to profile the credit worthiness of the borrowers. Some startups even check borrower’s social media and online shopping data to gauge potential borrower’s credit worthiness.

To de-risk their credit portfolio further, several Fintech companies are also using alternative methods like psychometric models. Dependence on such innovative methods meant that all the traditional methodologies that demanded scores of documents were chunked out of the system. This led to faster dispensation of credit. So fast that all it took was few minutes to discharge credit. For small and medium size companies that were habitually conditioned for getting rejected, getting a loan with blink of an eye was nothing short of a revolution.

Today this revolution is been spearheaded by a strong Fintech ecosystem, which though young is growing at an exponential rate to meet the credit needs of India’s small and medium companies. Every month, literally new Fintech startups are getting added to the ecosystem that promises to dole out small to medium size ticket loans faster than all its competitors. Conventionally, Fintech’s loan can range from Rs 1 Lakh to Rs 1-2 crores. While sanctioning of Rs 1 Lakh to 10 Lakh takes only few minutes, loans amounting to crores of rupees take merely few days.

Today these and other scores of Fintech startups are addressing a market opportunity that is mammoth in size. Statistically, India’s nascent Fintech sector is expected to touch approximately $2.5-$3 Bn. But if we look at the bigger picture then we will come to know that India’s Fintech sector is waiting to implode in a big way. The bigger picture clearly shows that despite the on-going revolution brought forth by Fintech companies, nearly 80 to 85% of India’s MSME is still starving for loans, with a credit demand that runs in trillion. According to a rough estimate, MSME’s credit demand is estimated to be roughly $2 trillion.

Fulfilling such massive demand would require a robust Fintech ecosystem. Something that Reserve Bank of India has already acknowledged by simplifying procedures of NBFC license and giving licenses to deserving companies. Even Government of India has stepped in to help Fintech companies. While announcing this year’s budget, former Finance Minister Arun Jaitely said that government is seriously thinking to bring conducive polices to propel growth of Fintech companies.

Most companies want government to invest massively in artificial intelligence and other breakthrough technologies that play critical role in day-to-day functioning of Fintech companies.

Can NPA spoil the Fintech story?

Giving loans in matter of few minutes, something that now most Fintech companies are known for, is a catch 22 situation. While it helps Fintech companies to earn profit and MSME companies to fulfill their credit needs, the potential threat of non-performing assets (NPAs) cannot be ruled out. To counter NPAs, industry experts claim that Fintech startups will have to keep investing in technology to make it more effective. This will help companies to pre-empt potential bad debt in advance and make credit disbursal more secure, experts add.

However, some experts also argue that merely having sophisticated technology in hand won’t help in countering NPA problem. This is primarily because most MSME companies and small businesses operate in hinterland of the country. This makes it mandatory for Fintech companies to have a strong network across the country that will enable them to have a last mile connect with borrowers.

The last mile connect with borrowers is important because most of borrowers in MSME space are first time borrowers, who are largely unaware of the repercussion of loan default.

Conclusion

With massive credit gap to fill, the Fintech Industry in all probability is heading towards bright future. However, making their algorithms more effective and investment in AI & other breakthrough technologies is a bet that most Fintech companies will have to take. After all, the ghost of NPAs always invariably looms on every financial institution, be it a large bank or small NBFC company.